UK Corporates Increasingly Interested in FX Options: Survey
Posted by Colin Lambert. Last updated: October 28, 2024
The latest report from MillTech FX finds that amidst UK corporate concerns over the impact of FX volatility, these firms are exhibiting a growing interest in FX options.
The UK Corporates CFO FX Report for Q2, published by the platform, finds that83% of corporates have had their finances “impacted by the stronger pound”, with 50% of them finding the impact positive and 50% negative – in other words, FX volatility has affected corporate earnings, something that should not come as a shock to anyone. That increased volatility has, again inevitably, led to rising FX hedging costs had risen over the past year, with 70% overall reporting this, and smaller firms feeling the pressure more acutely (85%) compared to larger companies (59%). For those that don’t hedge, the main reason given was because it was too expensive (76%), MillTechFX says, adding two of the top three FX priorities for UK corporates this year are reducing costs (31%) and ensuring cost transparency (29%).
Despite the increase in hedging costs, over three-quarters (76%) of UK corporates hedge their forecastable currency risk, a slight increase from last year (75%). Among those not hedging, 68% are now considering it due to market conditions. The average hedge length has increased 47% to 5.55 months this year, up from 3.78 last year, indicating that firms are seeking longer-term protection and stability. Meanwhile, the average hedge ratio remains steady at 45%, the same as in 2023.
Global geopolitical tensions are adding to the uncertainty for corporates, with many bracing for increased volatility. Over half (53%) of respondents plan to extend their hedge durations in response to these growing concerns. FX fears surrounding the upcoming US election are also prominent, with the top three being counterparty risk in hedging transactions (40%), the impact of policy changes on currency values (37%), and unpredictable market movements (37%).
To meet these challenges, MillTechFX says 64% of these firms are now using FX options “more frequently”, and while this tallies with the finding that 94% of respondents have found access to finance more difficult over the past year, it probably complicates processes given the survey also reports that 34% still trade by phone, 32% by email, and 30% by sending or uploading files.
Inevitably, AI gets a look in on the survey, with 100% of respondents saying they are exploring AI in some form. Price discovery (34%), risk identification (30%) and trade execution (29%) are the key areas being explored for automation, although perhaps the real secret is in how automating manual processes was corporates’ top priority (41%), this may or may not involve AI.
“2024 has been a challenging year for UK corporate finance leaders as they battle against high interest rates, inflationary pressures, geopolitical tensions, supply chain issues and more,”
says Eric Huttman, CEO of MillTechFX. “Among these challenges, heightened currency volatility stands out as a significant concern. Firms are grappling with fluctuating exchange rates that impact profit margins and overall financial stability. It’s encouraging to see the majority of UK corporates have taken proactive measures by hedging their FX risk. Those who have not embraced these strategies, however, risk facing severe financial repercussions.
“Rising FX hedging expenses are squeezing margins at a time when effective hedging is more critical than ever,” he continues. “Compounding this issue are tighter access to finance and increased fees and rates, further driving up the cost of doing business. Many corporate leaders may feel as though the walls are closing in on them. In this challenging environment, working with the right providers and employing technology can enable firms to get a clear sight of their costs, compare quotes from multiple providers, ensure best execution and take advantage of tools like margin-free FX hedging, reducing the need for credit and overall costs.
“As we look to the future, it’s evident that geopolitics and the upcoming US election are significantly influencing FX hedging strategies,” he concludes. “Finance leaders are caught in a delicate balance, weighing the costs of hedging and how much to hedge against the potentially limitless expenses of not doing so. This current landscape resembles a treacherous, icy road where the path ahead is uncertain. A well-crafted hedging strategy acts like traction control, providing stability and guidance as market conditions fluctuate. Without it, companies face the risk of losing control when volatility strikes.”